Can I Receive Social Disability & Keep My 401(k)?

March 20, 2011

By: Tom Streissguth

Your 401(k) should be safe, even if you are drawing Social Security disability.

Considerations

A 401k is a retirement account funded by employees and their employers through regular contributions. For many people, this account will provide their most important means of support after they retire. For that reason, it is important to protect the 401k and the investments it contains, no matter what happens to your employment.

Disability

Social Security disability is a program of benefits for those who have suffered an illness or injury and are no longer able to work. To be eligible, you must have paid in to the system for a sufficient amount of time (measured in work quarters), and you must have worked a minimum duration in the last 10 years. The minimums depend on your age; the older you are, the more work credits you need.

Assets and Eligibility

A 401k is considered a personal financial asset, from which you will eventually draw unearned income. Although Social Security disability does restrict the amount of earned income you can have, there is no restriction on the amount of your assets. You are allowed savings and retirement accounts in any amount.

SSI and 401ks

If you do not qualify for disability based on your work history, you may still qualify for Supplemental Security Income, or SSI. This program is means-tested, however, and restricts your resources (property, savings and other assets) to $2,000 if you are single and $3,000 if you are married. If your 401k exceeds these amounts, then you will be ineligible for SSI. The program also restricts the amount of monthly income you can earn and still be eligible.

Considerations

Once you are on disability, you can continue to contribute to your 401k. In addition, the IRS will waive the 10 percent early withdrawal penalty if you can prove you are permanently and totally disabled. If your employer continues to contribute to the plan, however, Social Security may have some questions on your current employment status and medical condition. You are not allowed to earn more than a limited amount of income from employment while on disability, and if you earn more, your disability benefits will be suspended.

Retirement

When you reach the full retirement age, according to the Social Security tables, then your disability benefits convert to retirement benefits. You can take retirement as early as age 62, but if you are already on disability it makes no sense to do so, as taking early retirement will reduce the amount of the retirement benefits you will eventually be forced to take a few years later. You can, of course, keep earning from the 401k and remain on disability.